Submitted by: Mike Spindell, Guest Blogger
When I started as a college student about 50 years ago I took the Sociology I course as a required subject. There is little I remember from that course and less I remember about the instructor, except for his introductory words on the first day of class. To paraphrase him he said: “You will be taking a lot of courses in what are called the Social Sciences. Approach them all, including mine, with skepticism because they really aren’t science courses like those you’ve learned as a high school student. They will spend a lot of lecture time though trying to prove they are truly scientific, don’t believe them”. His clear meaning was that although the Social Sciences try to operate as if they are using the scientific method of experiments/research to prove theories, most of the work done is skewed to prove the theory of choice by those doing the research. In the five decades since that lecture my own experience and reading has taught me how true the advice from that long forgotten Sociology instructor is.
The social science that has my attention at the moment is Economics. I’ve read many an economist, from all points on the political spectrum and frankly while I favor those such as Krugman and Baker, I take most of what they say as opinion, rather than scientifically determined truth. Yes I’ve even read “Freakonomics” by Levitt and Dubner and the follow-up “Superfreakonomics” and while they were good reads I see them as not only bad science, but a conflation of economics with other social sciences that is superficial at best. This is really the problem with many economists and their theories. They presume to divine human behavior via the prism of economic theory. In the end their proofs are merely retrofitting their pre-judgments. That brings me to the “Austerity” movement which has hampered the recovery from the economic “depression” brought on by the wars and tax reductions of the Bush years, while it has also caused a crisis worldwide through its imposition upon many nations. The foundation research that has justified this “Austerity” movement came from two Harvard Professors: Carmen Reinhart and Kenneth Rogoff. A University of Massachusetts student Thomas Herndon found that their work was filled with mathematical errors in their research spreadsheets. http://www.huffingtonpost.com/2013/04/16/reinhart-rogoff-austerity-research-errors_n_3094015.html Their spreadsheets were their “proofs” that economic austerity promotes economic recovery and this theory, long held by many economists, is the basis for the imposition of austerity onto so many Nation’s economies and is the source of bitter national debate in our own. Though I will present some overview and links amplifying “austerity’s” false assumptions, my interest is in presenting my view on why the powers that be have imposed this doctrine, whose effects fall squarely upon 99% of the people of these nations, leaving the wealthiest unscathed.
Thomas Herndon with others published a paper about Reinhart/Rogoff’s findings stating this:
“ The new paper, by Thomas Herndon, Michael Ash, and Robert Pollin of the University of Massachusetts, Amherst, set out to reconstruct the findings of an influential 2010 paper by Reinhart and Rogoff, called “Growth In A Time Of Debt.” Reinhart and Rogoff, both of Harvard, claimed that economic growth slowed fairly dramatically for countries whose public debt crossed a threshold of 90 percent of gross domestic product.
The problem is that other economists have been unable to recreate Reinhart and Rogoff’s findings. Herndon, Ash and Pollin now say they were able to do so — but only by leaving out big, important pieces of data.
Using the same spreadsheet that Reinhart and Rogoff used for their research, Herndon, Ash and Pollin found that “Growth In A Time Of Debt” was built around a handful of significant errors. Correcting for those errors changes the findings dramatically: Average GDP growth for high-debt countries jumps from negative 0.1 percent to 2.2 percent.”
What we see then is that calculation “errors” showed that GDP growth for high debt countries actual increased rather than decreased. Reinhart and Rogoff (R&R) have been arguing that debt decreases GDP as the rationale for austerity and their argument seems not only unproven, but wrong. It gets worse.
The Harvard economists have argued that mistakes and omissions in their influential research on debt and economic growth don’t change their ultimate austerity-justifying conclusion: That too much debt hurts growth.But even this claim has now been disproved by two new studies, which suggest the opposite might in fact be true: Slow growth leads to higher debt, not the other way around.
In a post at Quartz, University of Michigan economics professor Miles Kimball and University of Michigan undergraduate student Yichuan Wang write that they have crunched Reinhart and Rogoff’s data and found “not even a shred of evidence” that high debt levels lead to slower economic growth. And a new paper by University of Massachusetts professor Arindrajit Dube finds evidence that Reinhart and Rogoff had the relationship between growth and debt backwards: Slow growth appears to cause higher debt, if anything.
As you can see from the chart from Dube’s paper below, growth tends to be slower in the five years before countries have high debt levels. In the five years after they have high debt levels, there is no noticeable difference in growth at all, certainly not at the 90 percent debt-to-GDP level that Reinhart and Rogoff’s 2010 paper made infamous. Kimball and Wang present similar findings in their Quartz piece.
This contradicts the conclusion of Reinhart and Rogoff’s 2010 paper, “Growth in a Time of Debt,” which has been used to justify austerity programs around the world. In that paper, and in many other papers, op-ed pieces and congressional testimony over the years, Reinhart And Rogoff have warned that high debt slows down growth, making it a huge problem to be dealt with immediately. The human costs of this error have been enormous.
Even after University of Massachusetts graduate student Thomas Herndon found Reinhart and Rogoff’s work included errors and that their 2010 paper was missing important data, the researchers stood by their ultimate conclusion: that growth dropped off significantly after debt hit 90 percent of GDP. They claimed that austerity opponents like Paul Krugman have been so so rude to them for no good reason.” http://www.huffingtonpost.com/2013/05/30/reinhart-rogoff-debunked_n_3361299.html
What is so infuriating about R&R is the destruction that follows in the wake of there now debunked theories. The unemployment in Europe is has reached record high levels high levels, countries like Greece and Spain have rioting in the streets and a new neo Nazi movement is gaining popularity throughout Europe. http://www.huffingtonpost.com/2013/05/31/eurozone-unemployment-record-high_n_3364881.html The cost in human suffering is incalculable, but these fatuous academic asses are not concerned with people, they are concerned with their reputations and they are concerned with catering to wealth. Their theories, rather than being the result of real research and experiment, are in effect self-fulfilling prophecies. This is NOT science; it is overweening egotism in tandem with uncaring self interest. This tale, however, gets worse. Huffington Pos contributor: Mark Gongloff wrote this article on Friday: “Austerity Fanatics Won’t Let Mere Economics Stop Them From Thinking They’re Winning” in it he writes:
“Like Hiroo Onoda, the Japanese soldier who hid on an island in the Philippines for 30 years refusing to believe Japan had lost World War II, austerity fanatics are never going to admit their failure. Instead, they are going to keep pushing the policies that are making millions of people in Europe and the United States miserable.
The latest example of their denial is a piece by Michael Rosen of the American Enterprise Institute, a conservative think tank, entitled “Austerity And Its Discontents.” He declares that, far from being shamed by the recent discovery of errors in influential research by Harvard economists Carmen Reinhart and Kenneth Rogoff, austerity fans have recently gained “the upper hand” in the global argument over austerity.
Rosen argues that Reinhart and Rogoff’s many loud rebuttals to their critics helped give austerians the “intellectual high ground.” He ignores that, in fact, Reinhart and Rogoff’s rebuttals have only compounded their errors. He also ignores that further research has debunked Reinhart and Rogoff utterly, revealing that their biggest mistake was in confusing the cause-effect relationship between high debt and growth. It turns out, contra Reinhart and Rogoff, that there is no evidence that high debt causes slow growth — in fact, the opposite might be true.
But then the austerians have never really needed the intellectual high ground. Their phobia of government debt is based mainly on the idea that debt is just bad because of course it has to be. It is bad when people take on a lot of debt, ipso facto the same thing is bad for government. We must eat our spinach, not our dessert!
Rosen is absolutely right when he points out that Germany, and the American Enterprise Institute, and the Wall Street Journal editorial page, and Michael Kinsley, and the many, many other long-time fans of austerity have only redoubled their efforts to push austerity measures in the wake of the Reinhart-Rogoff debunking and re-debunking. http://www.huffingtonpost.com/2013/05/31/austerity-failure-fanatics_n_3367787.html?ref=topbar
Now that I’ve presented the situation to you at least from my side of the fence, you can make up your minds about austerity. While I agree with many of the conclusions delivered by the writers quoted above my slant on it all is somewhat different. I believe that all economic theories and political theories, despite their validity, mask what is truly going on in our world today. It is easy of course to compare the call for austerity by conservatives under Democrats and the out of control spending and debt run up in the Reagan, Bush I and Bush II administrations. This comparison would lead one to believe there is fiscal hypocrisy at the bottom of this and that is true. However, the fiscal hypocrisy exist as much among Democrats as Republican’s as Max Baucus proved in his terms as Senator. Bill Clinton cut government to balance the budget. He aided in the erasure of Smoot Hawley and he hurt American jobs by signing NAFTA and CAFTA. President Obama has likewise played the fiscal conservative card, while complaining it has been forced on him. He has even put cuts of Social Security and Medicare on the table, although neither is related to the national debt.
What is happening here is the result of the wealthiest people and the largest corporations becoming international entities. The rise of the multi-national could well herald the decline and fall of the nation state. From the perspective of the “Haves” it makes perfect sense. Why be bound by the laws of a particular nation, when you can break free and roam the world as you please? Truly, to these multi-nationals and the people behind them, the world is their oyster. The only problems they have are government regulation, taxes and those pesky workers who want more wages. The solution is to bring the 99% to a level slightly above starvation. This ensures that they will work for any amount that helps them put some food on the table. It necessitates that social assistance programs be destroyed so the peasants will have no choice but to seek shelter from devastation at some low paying job that keeps them little above subsistence.
Imagine yourself as one of the Super Rich, or as the CEO of a huge multinational corporation. My guess is that most of them see themselves as extraordinary people, chosen by fate or God to be in their exalted positions. They are able to go anywhere in the world on a whim. They don’t have one palatial home they have five, some in the world’s greatest Cities and others in the world’s most beautiful places. They don’t have one luxury car they have twenty collectibles and a fleet of limousines to take them place to place, flanked by bodyguards. While it’s true some wealthy eschew these outward signs, usually it is done as some sort of reverse snobbery, like the Kennedy penchant for driving Oldsmobiles, or J.B. Hunt driving to work every day in an old Chevy, with a paper bag lunch prepared by his wife.
The rich are not like your and me and moreover they know it. The truth is austerity is one more step on the road toward worldwide feudalism. Our wealthy class has helped to plot this out and they are served by people like Reinhart and Rogoff as courtiers and henchmen. They are leading us to a chaos they believe will result in solidifying their hold on the world and their eventual Nobility. However, when chaos descends on society through the discontent of so many, even wealth might not be protection against the violent psychopaths that gain control. That’s what I think about austerity, what do you think?
**Using the same spreadsheet that Reinhart and Rogoff used for their research, Herndon, Ash and Pollin found that “Growth In A Time Of Debt” was built around a handful of significant errors. Correcting for those errors changes the findings dramatically: Average GDP growth for high-debt countries jumps from negative 0.1 percent to 2.2 percent.”
What we see then is that calculation “errors” showed that GDP growth for high debt countries actual increased rather than decreased. Reinhart and Rogoff (R&R) have been arguing that debt decreases GDP as the rationale for austerity and their argument seems not only unproven, but wrong. It gets worse.**
I’m still reading your piece Mike.
But everyone should stop & think about this point for a second.
The current way GDP is figured it leaves out most if not all external costs.
As an example I’ll use one of my favorite wiping post, the Nuke industry.
When they are figuring Nuke industries out put they don’t take into account/energy wasted, environmental damage caused by mining ore or on the backside of the process of dealing with the waste.
The real kick in the crouch are the cases like the Jap/GE Fukushima Nuke disaster.
So they produced a lil bit of electricity, but just look at the loss in value to the world/Pacific Ocean, etc.
Do you eat protein, veggies, drink milk? Do you like cancer & tumors?
What is the $$$ value of all they’ve destroyed/tainted with just a few of those Nuke plants & their on going melt down mess.
No one can be sure of what the real GDP numbers are, but I’m 100% positive GDP has been a large number in the negative column for at least the last century.
How much protein did the world lose in the Gulf of Mexico by the BP spill & for how many years?
If I didn’t trust the aholes running things so much I’d swear they are intentionally destroying our food sources worldwide to kill us off. ( sarc off lol;) )
Hedge Fund fraudsters and Bankster gamblers in the Global Wall Street Casino absolutely love mountains of debt They even have their own sacred name for it: “Leverage.”
Ask Mitt Romney about this financial crowbar and he will explain by not showing you his income statements or tax returns. Slightly less than half of the U.S. electorate voted for this leveraged-buyout charlatan anyway. Go figure.
Some famous guy a 100 or so years ago said something like; At some point the people will realize they have no choice but to do to war against the (big) banks.
Just read the long history of banking & you’ll see what I mean.
I’d add also insurance co’s & tax free foundations/charities.
One wishes to do charity work fine, just don’t do it riding on my tax dime! I/we owe you nothing for your acts of charity foundations so you can hide your billions & control power from there. I do my own charity, thanks. IE: Ford foundation, Rockefeller foundation, etc…
Paul Krugman, if you don’t mind I’ll flush that turd, he’s just a paid shill/moron for big Wallst/London ponzi scams.
Mike S, how far down this rabbit hole do you care to do? 😉
Zerohedge.com
“The first principle [of science] is that you must not fool yourself – and you are the easiest person to fool.” -RICHARD FEYNMAN
Today Egon von Greyerz gave King World News one of his most powerful interviews ever. Greyerz spoke about the frightening reality of what is really taking place with countries around the globe. He also discussed the physical gold market and said that the current level of physical trading is “incredible.” Below is what Greyerz, who is founder of Matterhorn Asset Management out of Switzerland, had to say in this remarkable interview.
Greyerz: “Eric, the world already hit a massive iceberg back in 2008, and it’s been sinking slowly ever since. The fact that money has been pumped into the system around the globe has meant that the sinking is going more slowly than it otherwise would have.
Of course this money printing will have no positive long-term effect or benefit whatsoever since printed money is worthless and can never add any value. But it’s making the process slow and painful for the world. People are in total denial, the band is still playing and the people are still dancing on the ship.
Just look at the world economy. Japan is a disaster case with astronomical debt and zero interest rates. They will not survive. In Europe we have so many basket cases which have no chance of survival. Take Spain, Portugal, Italy, Greece, France, the UK, they are all totally bankrupt economies….
http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/5/31_The_Current_Level_Of_Physical_Gold_Being_Traded_Is_Shocking.html
Michae Murry,
The story told by your mother and crafted with your usual skill, encapsulates why I oppose the Corporatists. A dose of their own medicine would be a fwir punishment gor yhe harms they’ve done.
Testing the “strikeout” HTML tag:
Defense War spending consumes over half of America’s productive economic output.
I think there are no free lunches.
Great article Mike….
Word press cut my word off. They make more faucets per week and pay their workers a bit more but in the long run they are more “productive” in Germany than in Greece. Yet they share the same currency. Germany needs to go back to the Mark. Greece needs to be on the Drachma. The Euro was a mistake.
Austerity has at least two sides or aspects when we speak of present day Europe. There is debt and then there is slovenliness. Those that owe have to pay. Owe too much and you pay too much to enjoy the fruits of your labor. Then there is slovenly behavior. Don’t work a 40 hour week. Work a 30 hour week with time off for siesta. You have a factory that makes faucets. Your factory is in Greece. Your guys work 30 hours a week and are slow. You cmepe with the Germans who make faucets in their factory up in Bonn. They work hard for 40 hours with n time off for siesta. They make more faucets per week and pay their workers a bit more but in the long run they are more “proeuctive”.
That’s why the likes of Obama and his crony corporate pals are pushing the Trans Pacific Partnership. They want the elites and corporations to be bound by a different set of laws than the laws of the people. https://www.eff.org/issues/tpp
Congress gives banksters trillions in taxpayer bailouts with few strings attached but they want the unemployed to pee in a cup to get a couple hundred a week until a job is found.
HSBC is given a fine, paid by the shareholders, for laundering money from drug cartels, but shoplift from Walmart and get killed. http://www.chron.com/news/houston-texas/houston/article/Shoplifter-s-family-sues-Wal-Mart-deputy-4337438.php This is more than anecdotal.
The system is being overhauled by the 1%, the large contributor to political campaigns and the corporate multinationals for the sake of the 1% and that is not a road that leads to prosperity, but it does lead to turmoil and tragedy.
There’s an old joke about economics:
An economics student goes back to visit his college professor 20 years later, and they talk about how the study of economics has changed. As part of it, the former student asks to see the final exam as a sign of how it changed.
The former student looks at it, and says, “This is the same test I took 20 years ago!”
The professor replies, “In economics, we don’t change the questions, we change the answers.”
——————————
The only economics opinions that have ever turned out to be more-or-less right is Naomi Klein’s description of ‘disaster capitalism’ in “The Shock Doctrine”. She got it right because it is a political book not an economics book. The goal of the IMF is to make other countries subservient (read: enslaved) to the US government, banking system and economy, and it does it very effectively.
“What is happening here is the result of the wealthiest people and the largest corporations becoming international entities. The rise of the multi-national could well herald the decline and fall of the nation state. From the perspective of the “Haves” it makes perfect sense. Why be bound by the laws of a particular nation, when you can break free and roam the world as you please?”
Bingo.
Americans of my parents Depression-Era/WWII generation had a well understood name for economic “austerity.” They called it “Herbert Hoover Economics.” Shortly before she contracted Alzheimer’s Disease and passed away — to my everlasting grief — I asked my mom to write something down for me regarding the early years of her life. She didn’t get far beyond getting married in 1944, having two children in 1947 and 1950, and my dad’s death in a car accident in 1952. But, relevant to the present topic, she began:
I say to apply “austerity” to those who advocate it for others. “Cash and carry” only — and Zero Debt Leverage — for the 1%. A little taste of the real thing — instead of some smarmy Orwellian neologism — ought to prove supremely educational.
I will also point out that, properly spent, debt is a positive. It can let one go to school and learn a trade that then pays the debt; it let me live in a house I was buying instead of benefiting an apartment owner with my rent. It paid for a car so I could drive to work.
Borrowed money, invested in “personal infrastructure,” is the right thing to do to improve one’s life. Running up a credit card on entertainments or the electric bill is kind of dumb. The same thing is true for nations; in times of economic downturn, the right thing to do is borrow money and invest it in new infrastructure (or repairing old infrastructure), education assistance and new research to create new industries. When the economy recovers the debt should be paid down, so funds can be borrowed in the next economic cycle.
Also like the personal case, borrowing more than a year’s salary (which is what our GDP represents for the nation) is no big deal, my house cost about three years worth of salary when I bought it. Most people have two or three years salary worth of fixed interest debt and don’t sweat it; most are using the things they bought (TV, furniture, house, cars, appliances) with that debt.
And the more money you owe in fixed interest debt, the more you should smile at the inflation numbers, because the fewer hours you will have to work to pay it back.
I believe there is a somewhat more prosaic and straightforward reason the rich do not like national debt; particularly that of the USA, and that reason is inflation. Ultimately the USA pays the interest on its debt by printing money and that causes inflation.
The worst effects of inflation are felt by the rich, because of two things the rich own: Money itself, and fixed interest debt. (For any that don’t know, lending others money is called “buying debt,” when somebody owes you money that is called “owning debt.”)
The value of both of those things is reduced by inflation. The money itself is obvious. The value of debt is reduced also, because if it were paid back, it can buy less after inflation than it could before inflation.
The wealthy (including corporations) own the most cash, and wealthy banks, individuals, and companies own most of the debt in the world; their investments are in mortgages, student loans, business capital loans, etc. They hate for us to print money, so they hate for us to have debt that demands the printing of money.
Mike: One of my colleagues likes to say, “If it has the word “science” in its name, it probably isn’t really a science at all.” Like “political science”, “social science”, etc. Chemistry, Physics, Mechanical and Electrical engineering, Mathematics — Real sciences do not have to advertise themselves as “science.”
If Greece doesn’t want to deal with austerity, they can exit the Euro. Maybe our public sector pension funds can load up on the new Greek bonds when they’re floated and see how that works out?
If the US doesn’t face up to our budget deficit, we’ll continue to pay through inflation and ultimately through soaring interests rates and a budget consumed by debt service.